Tuesday, July 9, 2019

The Democrats' Support of PAYGO is Unwise—in Fact, Dumb

PAYGO (PAY As You Go), enshrined into Federal law[1] is an erroneous and dangerous economic doctrine that has created much mischief over the past twenty-or-so years. It has made fools of the Democrats in Congress, who have treated it as a fiscal straitjacket, while the Republicans have ignored it when in power. The huge tax cut benefitting the top 1%, especially the top 0.1%, was a typical slap in the face to the Democrats, as well as the bottom 90%.

Tax cuts for the wealthy seldom turn the wheels of industry, which should create demand for skilled (or even unskilled) labor, because it is usually invested in stocks, bonds, and land. Some if it may trickle down to the lower 90%, but most of it ends up again in the hands of the upper 1%. Billionaires have little incentive to either consume more that they are already consuming or to invest in capital goods[2], like factories.

There’s a good economic argument that buying stock has nothing to do with investment, but is more like saving.

The lower 90%, and especially the lower 50% usually spend all their earnings on consumption, and spend tax cuts the same way, contributing to demand. There are several recent articles that elaborate on this theme. I strongly recommend them:

  1. Josh Bivins: The bad economics of PAYGO swamp any strategic gain from adopting it. 12/18/2018  ↩

  2. In economic parlance, the phrase “capital goods” means goods that are used to produce goods, including consumer goods and other capital goods. Examples of capital goods are, blast furnaces, metal stamping equipment, looms, woodworking tools, and microprocessor factories. Examples of consumer goods are: ice cream, autos, clothes, home computers, shingles, groceries, and goldfish.  ↩

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